Further GBP v USD Falls Will be Gradual
The key trend in currency markets over the past few months has been the unstoppable rise of the Dollar against the Pound, Euro and almost every major world currency.
This rise has been driven by the divergence in monetary policy between the Federal Reserve and the other major central banks like the Bank of England (BoE) and European Central Bank (ECB).
While the Federal Reserve prepares to end its zero interest rate policy, which has been in place since 2009, the BoE looks set to delay its monetary tightening after unanimously voting to keep interest rates unchanged at the past three meetings.
Simultaneously, the ECB has embarked on a new program of monetary stimulus, buying huge amounts of government bonds in the secondary market.
The rising Dollar stopped in the last month, with GBP/USD stabilising in the range of 1.46-1.50.
Sterling has lately been trading as it has for much of the post-2008 crisis period. It moves as a sort of blend between the Euro and the Dollar.
Interestingly we have seen the Pound weaken against the Dollar even as it strengthened against the Euro.
Markets – and myself specifically – expect the BoE to follow the Federal Reserve in hiking rates, albeit not until early 2016 in all likelihood.
Therefore, we expect to see a continuation of recent trends, with Sterling placing pressure downwards against the greenback while it manages some additional gains against the common currency.
The main reason for this has been the publication of relatively disappointing macroeconomic figures in the US, which suggests that growth has slowed in the first quarter of 2015.
This apparent slowdown was noticeable in the critical March employment data, with the rate of job creation falling by approximately half from the 6 month average of around 250,000.
This slowdown has led markets to delay their expectations for the date that the Fed will raise interest rates for the first time, as well as the pace at which it will continue to hike throughout 2015 and 2016.
The impact of this on Sterling could be a more gradual weakening of GBP against the Dollar than had been previously anticipated.
In the absence of major policy changes from the ECB, these expectations are the most critical factor in the evolution of the EUR/USD exchange rate, hence the recent Euro stabilisation we have seen in the currency markets.
Minutes from the latest Federal Reserve meeting in March, which were published this April, give mixed impressions.
Firstly, it is clear that several members of the committee see an interest rate hike in June as a feasible option, much earlier than expected by the markets.
Furthermore, the famous "dot plot" (below), where each member reveals their expectation for the future evolution of the level of interest rates, revealed that the Fed had downgraded its expectations about how often it expects to raise rates.
Finally, it appears that the general opinion of the committee is that recent macroeconomic disappointments in the US are probably, in a large part, due to the unusually harsh winter that has prevailed in the country.
I agree that the slowdown in the US economy is a temporary effect of the weather, as was the case last year.
I therefore expect a significant improvement in the tone of economic news in April and May.
This would leave the door open to an interest rate hike in June and a continued fall of the Pound and Euro against the Dollar, albeit at a much slower pace than we've seen since last Autumn.
Enrique Diaz Alvarez, Chief Risk Officer, Ebury
Before joining Ebury, Enrique worked in capital markets as a Portfolio Manager operating mainly in currencies and interest rates from a macroeconomic perspective for several hedge funds in New York and Madrid.
He worked as Managing Director of Société Générale in New York. Prior to his career in capital markets, he worked as a consultant for McKinsey & Co.
Areas of specialism:
- FX market insights
- Currency forecasts
- Navigating exotic currencies as an SME
- Financial risk management for the SME sector